Growing internationalisation and a mounting regulatory obligation means an increasing need to consider tax consequences when investing from Hong Kong and China.
When investing cross-border, the withholding tax burdens can be reduced by half.
These were the comments of Michel Bots, head of corporate services at Equity Trust for Greater China, in his introduction as host of the lunchtime thought-leadership seminar “Window on Tax” at Hong Kong’s China Club last month.
An audience of 50 lawyers and tax and financial consultants from Hong Kong then heard Ayzo van Eysinga, international tax specialist at Loyens & Loeff Luxembourg, tackle the issue of inbound and outbound investment structures from and to Hong Kong and China.
Looking at intermediate holding jurisdictions, he focused on the Benelux countries as his area of expertise although he did concede that Cyprus, Malta and Mauritius provided potentially good opportunities as well.
Ayzo pointed out that there are strong tax reasons for using a foreign holding company to repatriate foreign profits efficiently back to Hong Kong and China. Tax treaties provide for a significant potential reduction of foreign withholding taxes on dividends, interest and royalties as well as capital gains taxes.
Outlining typical structures for both inbound and outbound investments Ayzo pointed out that generally there is a ten per cent tax on EU investment into China. He suggested interposing a Hong Kong company, thus reducing the tax to five per cent, which is as low as it is possible to go in China.
Highlighting how to provide treaty access using a holding company Ayzo pointed out that the foreign investment jurisdiction needs to recognise the holding company’s residence. The magic word, he said, is substance. Substance and thus residence can be demonstrated by having an operational holding company. This means local directors, local board meetings, dedicated local office space and personnel on the payroll. In China there is an increased need for substance.
Miriam Keusen, senior manager corporate tax at KPMG in Hong Kong, examined the trends in the European fund industry and posed the question: what is in it for Asia?
“If you are based in Hong Kong is it worth considering an EU fund?” she asked.
She spoke of the impact of the updated EU Undertaking for Collective Investment in Transferable Securities legislation. This directive was last updated in January 2009 and has the aim of creating a single EU market for investment funds. This has been a huge success, she asserted, with total assets equalling 75 per cent of the European investment fund market, according to the European Fund and Asset Management Association. She also looked at the effect that the Alternative Investment Fund Management Directive could have if it is implemented. Any changes to the rules would probably become law in 2012.
“Why is this important in Asia?” she queried. “Because the EU is considering saying if you have a fund set up in Cayman, you may not set up in Europe.”
Pointing out that more and more hedge funds are being set up in Europe with the main jurisdictions being Ireland and Luxembourg, it is not clear whether non-European hedge funds will receive a passport under the AIFMD.
Host Michel Bots closed the event by outlining how Equity Trust could facilitate tax efficient Chinese outbound investments.
“Given the growth of internationalism and the continuing expansion of private and corporate wealth, you need competent and specialised support. In seeking this support you should look for independent services from an experienced, integrated global provider that is solution driven,” he said.